Institutional Investor's Alpha Magazine - October 2007 - (Page 78)

“The discussion on algorithmic trading is often narrowed to the trading side only, but we think there is a lot to be improved in clearing and risk management,” says Michael Peters, a member of Eurex’s board of directors. the exchange,” says Kelly Brown, director of hedge fund services for CME Group, the new corporate parent for CME and the Chicago Board of Trade following their July merger. “There are currently 8,000-plus hedge funds with an asset base of somewhere around $2 trillion — you just can’t ignore numbers like that.” Hedge funds are among futures and commodities exchanges’ most desired customers. They’ve provided much of the impetus for the move to electronic trading, which now accounts for three quarters of the volume on the CME. At the CBOT, which will be migrated over from its E-CBOT trading platform to Globex — the CME’s branded platform — in January, 78 percent of those contracts trade electronically. To win business, exchanges have begun tailoring their technologies to hedge funds’ unique trading needs, broadening their electronic product offerings and in some cases even altering their membership requirements and fee structures. “Exchanges realize that hedge funds are in many cases the lion’s share of their business and that they need to be in partnership with them in many different ways,” says Kevin Pilarski, a partner at Chicago-based hedge fund firm Kilkenny Capital Management. Pilarski, who was a senior manager of institutional international marketing at CBOT in the late 1990s, says that exchanges’ view of hedge funds has shifted dramatically since he was in the business. “We figured hedge funds were a growing part of the exchange, but we never marketed directly to them,” he adds. 78 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 Not long ago, trading in the futures market entailed phoning an order to a broker who was physically at the exchange. But when the futures exchanges opened the electronic gateway, access became easier, the speed of order execution increased and the quality of data for traders improved. Electronic trading for futures products such as interest rate and stock indexes has been around for roughly 15 years, but the recent addition of commodities to electronic trading platforms has led to an explosion in trading and record volumes. CME Group introduced side-by-side trading of commodities futures — the simultaneous offering of futures contracts for goods such as corn, wheat and soybeans electronically as well as in the pits — on August 1, 2006. Since then many hedge funds have expanded their trading into these products. CME has about 170 hedge fund firms trading agriculture futures, up from 60 before the introduction of side-by-side trading. In the first six months of this year, CME Group’s grain complex averaged 672,192 contracts a day, up 43 percent from the previous year, when the contracts were offered only during the day in the pits. “It’s gone beyond our initial set of expectations, and we were pretty bullish on it,” says Robert Ray, a senior vice president of business development at CME Group. “Electronic trading attracted a totally new set of users, leveraged up our distribution network and brought the market much further along.” The battle between the International Currency Exchange and the New York Mercantile Exchange (Nymex) over crude oil futures contracts has been heated. In February 2006, ICE launched electronic trading of its West Texas Intermediate crude oil futures to compete with the sweet crude oil futures traded on the Nymex floor. ICE’s new product is one of the fastest-growing futures contracts ever — and now represents 30 percent of WTI futures volume. In an effort to compete, Nymex launched side-by-side trading in crude and other contracts. Nymex has since recovered some market share in crude, and volumes in its energy and metals contracts are growing rapidly with the electronic platform. On September 19, almost exactly a year after it began offering the benchmark energy contract side-by-side, Nymex’s crude oil futures hit a record 616,688 contracts. Comparatively, the average daily volume for Nymex’s crude oil futures for 2006 was 283,080 contracts. “Hedge funds are pouring more resources into commodities, partly because they have gone electronic, and partly because there is a lot of interest in commodities trading,” says Michael Manning, president and CEO of Rand Financial Services, a futures brokerage specializing in hedge fund clients. “Electronic trading of commodities probably could not have come at a better time because of that increased interest.” Speed has been a major component in the competition among exchanges for hedge fund business. With a growing number of managers using algorithms — trading EUREX

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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